We’ve created a new economic aristocracy in America: CEOs. That’s a fair reading of recent
corporate-pay surveys. A study by compensation consultant Equilar for
The New York Times finds that Charif Souki of Cheniere Energy was the highest-paid CEO in
2013 at $141.9 million. Oracle’s Larry Ellison clocked in at $78.4 million. But more interesting
than these individual totals are typical amounts. In 2013, CEO pay for the top 200 companies
averaged $20.7 million, consisting of $6.8 million in cash and the rest in stocks and options.

Any CEO of a major company is virtually guaranteed to become a multimillionaire. In the Equilar
survey, the median holding of company stock was $83 million. CEO compensation has vastly
outstripped average wage gains. In 1980, CEO compensation for the top 350 firms was roughly 30
times typical worker pay, estimates the Economic Policy Institute, a left-leaning think tank. Now,
that ratio is almost 300-to-1. (The peak was nearly 400-to-1, in 2000.)

What does society get from this lavish pay? It’s unclear how much, if at all, economic growth
has improved. CEOs’ dependence on stocks might even have hurt the recovery if firms squeezed hiring
and investment to maximize short-term profits and share prices. Rising executive compensation has
fueled growing economic inequality. Executives and top managers represent nearly one-third of the
richest 1 percent of Americans by income, reports a study by economists Jon Bakija, Adam Cole and
Bradley Heim.

Let me be clear: I’m not against CEOs. Over the years, I’ve met many. They’ve usually struck me
as intelligent, well informed and down to earth. Few have seemed to be the stuffed shirts of
stereotypes. Of course, they promote their corporate self-interest. That’s what they’re paid to
do.

It’s also true that some CEOs are transformative. They decisively shape — or save — companies.
In this category, I’d put Lee Iacocca of Chrysler in the 1980s; Lou Gerstner of IBM in the 1990s;
and, more recently, Steve Jobs of Apple and Alan Mulally of Ford. There are others, including many
CEOs who are founders of firms. They often deserve hefty payouts.

Still, most CEOs are not so heroic or influential. Most seem overpaid by two common-sense tests:
You could pay them less, and most would take the job anyway; and many — if fired tomorrow — couldn’t
get work near their present pay.

The history of this overpayment is instructive. Until the 1980s, most CEOs were appointed from
within. They were “organization men” who spent most of their careers at one firm and identified
with it. “CEO pay was designed with reference to the rest of the organization,” says finance
professor Charles Elson of the University of Delaware. CEO pay couldn’t get too far ahead without
antagonizing others in the company.

This system presumed the superiority of American management. By the late 1970s, this premise was
untenable. Japanese competition threatened many U.S. firms. Profits suffered. Stocks lagged. “
Entrenched” executives often were blamed. New management ideas emerged. Companies should not
confine CEO searches to inside the firm. Outsiders often were more qualified. Executive
compensation should be aligned with “shareholders’ interests” — more pay should be in stock so that
CEOs would pursue higher prices.

Up to a point, this was a constructive response. Many firms were complacent and uncompetitive.
They needed to change, even at the cost of disruption. Otherwise, they would not survive.

But the new theories also produced accidental excesses. From 1980 to 2000, stock prices
increased by a factor of 12. Little of the gains reflected better management. The most-important
causes were declining inflation (and interest rates) and long economic expansions. But with more
executive pay tied to stocks, many CEOs enjoyed huge windfalls. All this affected norms and
expectations. Executive pay catapulted to a much higher plateau.

We’re left with a system that follows its own peculiar logic. As Elson notes, it has an upward
bias. In evaluating executives, company directors — often CEOs themselves — rely on compensation
consultants who compare pay levels with those at “peer” companies. But if most CEOs expect to be
paid at least the average of their peers, then the average will tend to rise.

Americans dislike aristocracies. Unless companies can find a more-restrained pay system, they
risk an anti-capitalist public backlash. This is the ultimate danger. For all the flaws of today’s
system, government regulation of pay — responding to political needs and pandering to popular
prejudices — would be much worse.